UNDERSTANDING PRE-ARBITRAL PROCEDURES: KEY STEPS & CONSIDERATIONS
INTRODUCTION: PRE-ARBITRAL CONDITIONS
In today’s global landscape, the preference for and adoption of arbitration as an alternative to traditional litigation has flourished significantly across various jurisdictions. This consistent progress underscores arbitration’s appeal, characterized by its expedited and flexible procedural framework, simpler and less formal rules of evidence, and the authoritative enforceability of arbitral awards with limited grounds for challenge. Arbitration thus stands as an ideal mechanism for speedy conflict resolution. [1]
One notable development within arbitration is the introduction of preconditions to arbitration. Over the past decade, leading practitioners and academics have examined the nature of these preconditions, often describing them as purely “procedural” with no substantive impact and suggesting that compliance might be optional. However, recent judicial decisions have highlighted two crucial components that have been overlooked or inadequately addressed. [2]
Arbitration clauses often outline pre-arbitration procedural requirements that must be fulfilled before initiating arbitral proceedings. These requirements frequently form part of a “multi-tiered dispute resolution” process. [3]
These requirements take various forms. Most commonly, arbitration agreements mandate that parties negotiate—sometimes for a specified period known as a “cooling-off” period and occasionally with designated company representatives—to resolve their differences before initiating arbitration[4]. Additionally, arbitration agreements may require parties to attempt resolution through mediation or conciliation, or through an initial non-binding decision by professionals such as engineers or architects before commencing arbitral proceedings[5]. Other clauses may impose specific time limits on when arbitration must begin, such as within a certain period (e.g., three or six months) after a dispute arises. [6]
These diverse provisions aim to enhance the efficiency of the international arbitration process by encouraging amicable dispute resolution and minimizing unnecessary legal proceedings and expenses. As one proponent aptly stated:
“By shifting the resolution of the dispute to a sequence of ADR proceedings aimed at cooperation (through the management or technicians) rather than confrontation (the lawyers in an arbitration), the further business relationship between the parties, without the disturbance and burden of litigating their dispute before the arbitral tribunal, is also preserved. This is of particular significance concerning long-term contracts.”[7]
MANDATORY ‘SHALL’ CLAUSES IN PRE-ARBITRAL PRECONDITIONS
Pre-arbitral contractual preconditions that include mandatory ‘shall’ clauses are deemed compulsory across various jurisdictions.[8] These clauses are expected to be substantially complied with as a solemn duty to uphold the principles of party autonomy and consent, which justify their inclusion in contracts.[9]
When such ‘Contractual Preconditions to Arbitration’ are not met, parties must often complete the ADR steps before proceeding to arbitration. Even if the tribunal has jurisdiction, premature claims indicate that these preconditions act as jurisdictional impediments.[10] Contractual interpretation rules mandate that parties fulfill these preconditions substantially before moving to arbitration. [11]
In contrast, ‘may’ clauses offer limited flexibility compared to binding ‘shall’ clauses but still respect party autonomy and consent.[12].Public policy considerations support the enforcement of ‘shall’ clauses, as seen in judicial decisions across jurisdictions. These preconditions are not conflicting dispute resolution clauses but are intended to escalate disputes through initial amicable settlement attempts, saving time, and money, and preserving relationships. [13] This viewpoint was eloquently articulated by Chief Justice N.V. Ramana of the Indian Supreme Court, [14], referencing ADR mechanisms in the Mahabharata and advocating for mandatory ADR as a public policy. Similarly, the Singapore Court of Appeal in 2013 upheld the binding nature of pre-arbitral steps in Lufthansa,[15]emphasizing substantial compliance. The FIDIC form, widely used in France and the Middle East, also mandates compliance with Dispute Adjudication Board (DAB) procedures before arbitration.[16]
INDIA’S PERSPECTIVE ON PRE-ARBITRAL CONDITIONS
The Indian courts have yet to definitively address the issue of whether non-compliance with arbitral preconditions affects the jurisdiction of the tribunal or merely its admissibility. However, examining existing judicial pronouncements on related issues provides some insight.
In BSNL v. Nortel Networks (India) Pvt. Ltd.,[17] the Supreme Court applied the “tribunal versus claim test” to determine if a statutory time bar is a jurisdictional or admissibility issue. This test distinguishes objections targeting the tribunal (jurisdiction) from those targeting the claim itself (admissibility). The Court ruled that limitation issues pertain to admissibility, as they challenge the claims’ nature rather than the tribunal’s authority.
Similarly, in United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd.,[18] the Supreme Court held that preconditions for arbitration, such as admitting the amount under a policy, must be met before arbitration can proceed. This decision implies that such preconditions are integral to the admissibility of the claim.
Conversely, in Demerara Distilleries Pvt. Ltd. v. Demerara Distillers Ltd.,[19] the Supreme Court considered whether preconditions had been fulfilled through party correspondence, especially when preconditions were vaguely defined. The Court deemed that attempt at mutual discussion and mediation, although stipulated, were not mandatory, viewing them as formalities rather than jurisdictional prerequisites.
In S.K. Jain v. State of Haryana,[20]the Supreme Court ruled that mandatory preconditions must be adhered to before the tribunal assumes jurisdiction. This decision followed the tribunal’s own conclusion that it lacked jurisdiction due to unmet preconditions.
In Akhil Gupta v. Hindustan Unilever Ltd.,[21] the Delhi High Court, through Justice Prathiba M. Singh, addressed the validity and relevance of pre-arbitral steps when one party fails to respond to notices for amicable settlement. This ruling emerged from a dispute under a Redistribution Stockist Agreement dated 14.07.2021. The agreement included a multi-tier dispute resolution clause requiring initial amicable settlement attempts, followed by Ombudsman intervention, and finally arbitration if needed. The respondent terminated the agreement on 22.02.2022, leading to a dispute over dues, prompting the petitioner to issue a notice of arbitration. The respondent did not reply to the arbitration notice but instead filed a suit in the Gurgaon District Court. The petitioner sought the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act. The respondent argued that the petition was premature as the multi-tier dispute resolution clause was not fully exhausted. The Court noted that the respondent’s failure to reply to the notice invalidated their insistence on fulfilling pre-arbitral steps and ruled that pre-arbitral steps lose relevance when one party fails to engage in the process, dismissing the respondent’s objection. Consequently, the Court appointed an arbitrator to resolve the dispute. This decision underscores that the obligation to engage in pre-arbitral steps becomes irrelevant if a party fails to respond to notices for amicable settlement, emphasizing the need for active participation in dispute resolution processes.
CONCLUSION
Indian jurisprudence remains unsettled on whether non-compliance with arbitral preconditions affects jurisdiction or admissibility. Key cases reveal varying interpretations, highlighting the need for precise drafting of dispute resolution clauses. Mandatory ‘shall’ clauses in pre-arbitral steps are upheld across jurisdictions to ensure party autonomy and consent, while ‘may’ clauses offer limited flexibility. The enforcement of these preconditions, as advocated by judicial authorities and exemplified in global practices like the FIDIC form, emphasizes the importance of initial amicable settlements. Clear, unambiguous clauses with specific timelines are essential to avoid delays and ensure effective dispute resolution.
-L RAGHAVI
Intern
Ramaiah College of Law
[1] Sampurna Mukherjee, Whether Contractual Preconditions to Arbitration should be regarded as ‘Impediments’ to an Arbitral Tribunal’s Jurisdiction, The American Review of International Arbitration Columbia Law School (2022).
[2] Id.
[3] See §1.04[E][8]; §2.02[C][2][f]; Ahmed & Ali, International Arbitration: Clause and Effect, 172 New L.J. 15 (2022); Berger, Law and Practice of Escalation Clauses, 22 Arb. Int’l 1 (2006); Born & Scekic, Pre-Arbitration Procedural Requirements: “A Dismal Swamp,” in D. Caron et al. (eds.), Practising Virtue: Inside International Arbitration 227 (2015); Chapman, Multi-Tiered Dispute Resolution Clauses: Enforcing Obligations to Negotiate in Good Faith, 27 J. Int’l Arb. 89 (2010); Figueres, Multi-Tiered Dispute Resolution Clauses in ICC Arbitration, 14(1) ICC Ct. Bull. 82 (2003); Jacobs, Should Mediation Trigger Arbitration in A Multi-Step Alternative Dispute Resolution Clause?,15 Am. Rev. Int’l Arb. 161, 179 n.77 (2004) (use of multi-step dispute resolution provisions has“expanded exponentially”citing domestic U.S. authority); Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27 J. Int’l Arb. 551, 553 (2010); Palmer & Lopez, The Use of Multi-Tiered Dispute Resolution Clauses in Latin America: Questions of Enforceability, 14 Am. Rev. Int’l Arb. 285 (2003); Pryles, MultiTiered Dispute Resolution Clauses, 18 J. Int’l Arb. 159 (2001); Rhodes, Have the Risks of ADR Escalation Clauses Reduced?, 82 Arb. 16; Salehijam, The Role of the New York Convention in Remedying the Pitfalls of Multi-Tiered Dispute Resolution Clauses, in K. Fach Gomez & A. Lopez-Rodriguez (eds.), 60 Years of the New York Convention: Key Issues and Future Challenges 35 (2019).
[4] See §2.02[C][2][f]; Award in ICC Case No. 9977, 14(1) ICC Ct. Bull. 84 (2003); Sierra Leone v. SL Mining Ltd [2021] EWHC 286 (Comm) (English High Ct.) (multi-tier dispute resolution clause providesfor three-month cooling-off period); G. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing 103-04 (6th ed. 2021); Chapman, Multi-Tiered Dispute Resolution Clauses, 27 J. Int’l Arb. 89 (2010); Figueres, Multi-Tiered Dispute Resolution Clauses in ICC Arbitration, 14(1) ICC Ct. Bull. 71 (2003); Pryles, Multi-Tiered Dispute Resolution Clauses, 18 J. Int’l Arb. 159 (2001).
[5]See, e.g., American Institute of Architects, General Conditions of the Contract for Construction.1 (1997) (“The [American Institute of Architects’] General Conditions A201 statesthat the owner and contractor will initially refer all claimsto the architect for decision ‘as a condition precedent to mediation, arbitration or litigation’”); Boog, How to Deal with Multi-Tiered Dispute Resolution Clauses, 26 ASA Bull. 103 (2008); Debattista, Drafting Enforceable Arbitration Clauses, 21 Arb. Int’l 233 (2014); Jolles, Consequences of Multi-Tier Arbitration Clauses: Issues of Enforcement, 72 Arb. 4 (2006); Kayali, Enforceability of Multi-Tiered Dispute Resolution Clauses, 27 J. Int’l Arb. 551 (2010); McMillan & Rubin, Dispute Review Boards: Key Issues, Recent Case Law, and Standard Agreements, 25 Constr. Law. 14 (2005); Mitrovic, Dealing with Consequences of Non-Compliance with Mandatory Pre-Arbitral Requirements in Multi-Tiered Dispute Resolution Clauses: The Swiss Approach and A Look Across the Border, 37 ASA Bull. 559 (2019); Oetiker & Walz, Non-Compliance with Multi-Tier Dispute Resolution Clauses in Switzerland, 35 ASA Bull. 872 (2017); Pryles, Multi-Tiered Dispute Resolution Clauses, 18 J. Int’l Arb. 159 (2001). See also Award in ICC Case No. 6535, discussed in Seppälä, International Construction Disputes: Commentary on ICC Awards Dealing with the FIDIC International Conditions of Contract, [1999] ICLR 343 (partiescould not commence arbitration until having requested and obtained decision from engineer); Partial Award in ICC Case No. 6276, 14(1) ICC Ct. Bull. 76, 77 (2003) (dispute would be resolved through arbitration only where party had fulfilled both preconditionsto arbitration, “namely first the resort to amicable settlement and secondly the submission of the dispute to the Engineer”); ST Group Co. Ltd v. Sanum Invs. Ltd, [2019] SGCA 65, ¶64 (Singapore Ct. App.) (“multi-tiered arbitration agreement that apparently provided that even if a relevant dispute had been settled by a court in litigation proceedings, the party who was dissatisfied with the court’s decision would then be able to refer the same dispute to arbitration”); PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation, [2011] SGCA 33 (Singapore Ct. App.) (FIDIC adjudication provision).
[6]The following are illustrative examples: “The Parties agree to make all reasonable efforts to settle any dispute arising out of or relating to this Agreement by referring such dispute to their respective senior managers for a period of not less than 30 days following receipt of written notice describing such dispute from any other Party. In the event that the dispute is not resolved during such 30 day period, the Parties agree to submit such dispute to arbitration under [Rules]” or “All disputes arising out of or relating to this Agreement may be submitted to arbitration under [Rules] within 12 months of the date on which such dispute arises.”
[7] Berger, Law and Practice of Escalation Clauses, 22 Arb. Int’l 1, 1 (2006).
[8] Nirman Sindia v. Indal Electromelts Ltd., (1999) SCC OnLine Ker 149 ¶ 10 (India).
[9] SBP & Co. v. Patel Engineering Co., (2005) 8 SCC 618 (India).
[10] Haldiram Mfg. Co. (P) Ltd. v. DLF Commercial Complexes Ltd., 2012 SCC OnLine Del 2139 ¶ 20 (India).
[11] See Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee, (2014) 6 SCC 677 (India)
[12] Siemens Limited v. Jindal India Thermal Power Ltd., (2018) SCC OnLine Del 7158 (India).
[13] PT Tri-MG Intra Asia Airlines v. Norse Air Charter Ltd. [2009] SGHC 13; BXH v. BXI [2019] SGHC 141; Lawrence BOO and Christine ARTERO, Arbitration, (2019) 20 SAL Ann Rev 59.
[14] The Indian Express, Courts should be last resort for dispute resolution: CJI N V Ramana, December 5, 2021, https://indianexpress.com/article/india/cji-n-v-ramana-dispute-resolution-courts-7656033/; The Mahabharata, Kisari Mohan Ganguli, Book 5: Udyoga Parva, Bhagwat Yana Parva, Sec. LXXII, https://www.sacred-texts.com/hin/m05/m05072.htm.
[15]International Research Corp PLC v. Lufthansa Systems Asia Pacific Pte Ltd and Another, [2013] SGCA 55.
[16] Supra Note 1.
[17] BSNL v. Nortel Networks (India) Pvt. Ltd (2021) 5 SCC 738 (India).
[18] United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd (2018) 17 SCC 607 (India).
[19] Demerara Distilleries Pvt. Ltd. v. Demerara Distillers Ltd (2015) 13 SCC 610 (India).
[20] S.K. Jain v. State of Haryana (2009) 4 SCC 357 (India).
[21] Akhil Gupta v. Hindustan Unilever Ltd (Arb. P. 460/2024 before the High Court of Delhi).null
Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of BIMACC, any of the members of the Board, or the empanelled neutrals.